Who Needs LifeTime Value?

Jim's Note: It is not essential to figure out the exact monetary
LifeTime Value of a customer. What you want to really know is the relative
LifeTime Values of your customers.

Let's talk about one of the most confusing and misunderstood parts of
customer marketing, LifeTime Value. The LifeTime Value of a customer
is the net profit the customer generates over their LifeCycle.

People tell you not to spend more to get a customer than their LifeTime
Value, or you will lose money. This is true on the face of it, but
actually figuring out what the LifeTime Value of a customer is can be a difficult
task, especially if you don't have the right tools. Besides, what if
you are a new company, or have never tracked the data you need to
calculate LifeTime Value? Is the concept useless to you?

Not at all. LifeTime value is used to make
decisions about allocating marketing to ideas that generate high potential
value customers, and away from ideas generating low potential value
customers. And to do this, all you need to know is the relative
LifeTime Value of the customers generated by each idea.
Recall LifeTime Value is the net profit the customer generates over their
LifeCycle. So if you know what the LifeCycles looks
like, you should
be able to do a pretty good job of determining who the highest LifeTime
Value customers are, relative to each other.

If you
do your Recency tracking on ads, PPC keywords, newsletter links, and so
on, you should be able to compare the relative potential value of the
customers generated by each approach and easily decide where your ad
budget is most profitably spent.

Let's say you have run 20 campaigns and you know your cost per new
customer from each of them. You want to run the top 10 (lowest cost
per new customer) but you only have the money for 5 campaigns. With
Recency and LifeCycle tracking on the 10 campaigns, all you have to do is
choose the top 5 campaigns generating customers with the highest potential
value based on Recency. If you allocate your budget to those and
away from the bottom five, you are maximizing your budget ROI, regardless
of the actual LifeTime Value in dollars of the customers generated.
What else could anybody ask for?

Continuing with our Ad #1 and Ad #2 example,
based on the LifeCycle chart
you just saw, can you make a judgment about which ad generates
customers with higher potential value? Looks like Ad #2 to me. Ad
#2 appears to generate customers with a longer LifeCycle, so their
relative LifeTime Value is higher when compared with Ad #1 customers,
given the costs of acquiring and maintaining customers from both ads is
roughly the same. Period.

And by the way, with the LifeCycle information in hand, is cost per new
customer really the issue? Probably not, because you have to weigh
the cost per new customer against the length of the LifeCycle.
Customers who are the cheapest to acquire may have the shortest
LifeCycles, and customers who are expensive to acquire might have very
long LifeCycles. So you really need the potential value and
LifeCycle tracking to get the whole picture.

The problem people run into with LifeTime Value is the whole question
of determining a LifeTime. There's no easy way to do it, and so the
whole idea gets tossed. People get frustrated because there's
nothing to grab on to, and no easy way to make comparisons.

But when you track the LifeCycle,
you know for a fact one group has a longer LifeCycle than the
other. Who needs the absolute LifeTime Value number in dollars and
cents? As long as you allocate money towards higher potential value
customers and away from lower potential value customers, you are
maximizing your resources in everything you do. And that is the reason people want to look at LifeTime Value in the
first place.

If you really need a hard number, don't be afraid to call an end to the
LifeTime. They're much shorter than you think. When you are
tracking your LifeCycles, and they start to approach 0% of customers
making a purchase in the past 30 days (or whatever standard you're using),
it's over. The LifeTime generated by these particular ads is over. Don't
hope customers will magically come back; it usually doesn't work like
that.

Once you call the end to the LifeTime, subtract your costs (cost of
products sold, ad costs, an allocation for service costs) from the
revenues for both Ad #1 and Ad #2 customers, and you'll have your LifeTime
Value.